By Failing to Lock Up Canadian Oil Supplies, U.S. Exposes National Energy Plan Flaws

[Editor's Note: A Money Morning reader wrote in to ask why the United States dropped the ball on the rich Canadian oil sands (the full question is posted below). Money Morning commodities expert Peter Krauth says it's part of another ill-advised national energy plan.]

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Under new U.S. President Barack Obama, it was all supposed to be different. The new administration had vowed to deliver a national energy plan that would guarantee this country's future energy security. The rich and geographically nearby Canadian oil sands should have been part of that plan.

At the end of the day, the United States dropped the ball on the oil sands, meaning Americans are stuck with yet another pieced-together national energy plan that has more sizzle than steak.

Unfortunately, the cost of this misstep will be higher than ever.


America's Energy Insecurity

U.S. President Barack Obama has a serious energy dilemma on his hands. This isn't a new story. In fact, it's the same dilemma that most U.S. presidents – Republicans and Democrats, alike – have had to face.

What's different now is the timing.

For the better part of a century, Canadians and Americans have had mostly positive, mutually profitable dealings.

But there were always tensions around the edges. 

Former Canadian Prime Minister Pierre Trudeau once famously remarked that Canada's relationship with its much-larger neighbor was akin to "a mouse lying in bed with an elephant." And a longtime Canadian investing adage holds that "when the U.S. economy sneezes, Canada catches a cold."

U.S. presidential administrations – and the current one is no exception – have pretty much taken for granted a potentially limitless access to the abundant resources of America's northerly neighbor. The attitude comes across as something akin to: "I'll just come get whatever I need."

But as they say in the racing world, "you snooze, you lose." America snoozed on the oil sands, and China beat us to the finish line.

This failure to lock up this energy source is just a part of what's going wrong with the current U.S. energy plan.

Understand an important point: This critique isn't motivated by politics … it's motivated by timing. These miscues are becoming apparent at a most-critical juncture, as this country tries to rebound from the worst financial crisis since the Great Depression. The United States will already be dealing with massive debt costs. Now it appears we'll be adding massive energy costs into that already-worrisome equation.

In his inaugural speech, with a reference to the "clean-energy economy," President Obama made it very clear that he wanted to encourage the use of green technologies to fuel America's energy needs, all the while insisting that energy security remained paramount.

My view is that President Obama had to establish a list of priorities.  He had to decide whether the risk of supply disruptions – in the near term – were outweighed by the benefits of responding favorably to environmental concerns and stimulus for the green power sector.  After all, at the time, stock markets were in the gutter, jobs were being slashed, and the average constituent who'd voted for him saw a pretty bleak future.

If you look at some of the policies that have been enacted since then, it's clear that the president chose to favor spending on jobs and green energy. 

He's not alone. 

You see, governments the world over are rushing to pass "green legislation." They are now requiring that higher minimum levels of electricity be generated from renewable energy sources in order to help fight global warming.

And they are throwing money at the challenge like there's no tomorrow.  Indeed, a recent United Nations report stated that worldwide investments in green-energy technology totaled $140 billion in 2008, an outlay that trumped the $110 billion earmarked for fossil-fuel projects – the first time that's ever happened.

The cynical side of me sees these financial statistics and concludes that the Obama administration must view this current state of affairs as a great opportunity for it to raise taxes and then redirect that additional revenue into the "sectors" it favors – under the guise that it is saving the planet and creating jobs (more on that below).

But the practical side in me realizes that, as investors, we just need to see the opportunity that's embedded in the new reality, and look for ways to profit.

Here are a few examples of these recent policies in the good ol' US of A. The investments are fairly substantial. But instead of taking a free-market approach in which the best product, or best technology, carries the day, these surgically focused programs have largely already identified the winning sectors, and winning technologies. For instance:

  • The American Recovery and Reinvestment Act will contribute 30% of the cost to build renewable power plants.  That's a huge chunk of any project that can be depreciated over five years.  Plus, the U.S. Energy Bonds Program will make loans available at a cheap rate of roughly 5% – or about half what they'd otherwise be. The U.S. Department of Energy (DOE) has earmarked a whopping $10 billion to this program to make it happen.
  • Prospective cap-and-trade legislation is widely anticipated from the Obama administration.  The goal is to cap the pollution any given plant can generate.  If polluters produce carbon dioxide emissions above their allowable limits, they will be forced to buy "carbon credits" from the likes of "green power producers" that generate little or nothing in the way of emissions.  So cap-and-trade is a potential source of tremendous additional income for the entire green power sector.
  • The U.S. government has an obsession with geothermal energy.  The government will be contributing $400 million to the DOE's Geothermal Technologies Program.  The goal is to enhance research for this sector.  All of this is in addition to the $2 billion that's already contributed to the DOE to further research and development.

Asia to Canada: Let's Make a Deal

Critics have blasted U.S. leaders and U.S. oil companies for not locking up as much of Canada's vast supply of reliable oil as possible. By failing to do so, the United States essentially opened the door for China and other Asian nations, which have been ardently courting Canada.

Just last September, we saw PetroChina Co. Ltd. (NYSE ADR: PTR) pay Athabasca Oil Sands Corp. (PINK: ATHOF) $1.9 billion in cash for a 60% stake in two undeveloped Canadian oil sands projects. It was PetroChina's biggest acquisition in North America.

In October, state-owned Korea National Oil Co. (KNOC) snatched Canada's Harvest Energy Trust for $1.8 billion in cash, and the assumption of more than $2 billion in debt – meaning the deal was done at a hefty premium to its market value. KNOC hopes to ship Alberta oil sands to refineries in South Korea.  That move not only helped concretize that Asian nation's plan to quadruple production from current levels to 300,000 barrels daily by 2012, it also enabled it to move assets out of depreciating greenbacks and into appreciating oil.

Just two weeks ago, the China Petroleum & Chemical Corp. (NYSE ADR: SNP), also known as Sinopec, offered $4.6 billlion for a minority stake in the Syncrude Canada Ltd. oil sands plant.  This attempted deal is causing waves, at least in Canada. 

Sinopec is Asia's biggest refiner, with an expanding capacity to process heavy oil, the kind Syncrude produces before upgrading to synthetic crude.  Syncrude is the world's largest producer of light sweet crude oil from oil sands.

The deal would give Sinopec a veto over any decision for Syncrude to invest in upgrading more oil in Alberta.  That province would clearly prefer to see upgrading done at home, since bitumen processing creates jobs and tax revenue.  This is the first time a Chinese state-owned enterprise is taking on a share in a major oil producer, so the Canadian government could soon be placing its foreign-investment-review policies under a powerful microscope.

Remember, too, that because of its centralized decision-making, China's government can act much more quickly, and without having to fear any public-opinion backlash. In the past, China also hasn't had to worry much about environmental groups or non-governmental organizations (NGOs) – just ask Tibetan protestors.

Another advantage Asian culture has in the realm of planning is its tendency to take a much longer view of major issues. For example, Chinese planners don't just consider the next quarter or the next year, they will look decades – or even generations – into the future, and will plan accordingly. It's a lesson Western corporate leaders would do well to observe, and perhaps even copy.

Considering the massive modernization most of Asia is undergoing, you can continue to expect an aggressive acquisition stance to be the norm for some time. 

After years of developing nations accumulating western fiat currencies through exports, we're now witnessing a massive generational transfer of wealth from West to East.

Obama's Flip Flop

This is sure to remain a hot issue.  But I believe that President Obama's approach may well be an excuse to favor homegrown U.S. businesses with a less obvious "Buy American" policy.  Here's what I mean.

I find it particularly interesting that President Obama recently did a complete 180-degree turnabout on his energy policy by opening parts of the Atlantic Ocean and Gulf of Mexico to oil drilling.

Money Morning Chief Investment Strategist Keith Fitz-Gerald attributes the change to an administration realization that a weakening greenback makes it difficult for America to accumulate oil assets outside U.S. borders. I think Fitz-Gerald is right.

So in one fell swoop, the new president can address multiple issues with this single move.  U.S. oil producers must be ecstatic to now be able to explore, at home, over vast areas, and using current technologies.  The lure of some attractive discoveries is strong.  At the same time, the president can now say that he's dealing with the issue of energy security, since anything newly discovered will be located inside U.S. borders.

More importantly, though, President Obama's cap-and-trade scheme may be nothing more than an insidious trap for foreign-energy producers, and an effortless windfall for American producers and distributors.  Under such a system, one can imagine a scenario where oil exporters would be required to have a quota allowance to sell into the U.S. market to "comply with environmental laws," where quota could only be bought from an American concern.  And voilà, a large chunk of the profits end up at home here in the United States, while the exporter's margins run thin.

It's true that developing new technologies to produce oil from oil sands more cleanly would counter some of this problem, but that takes years of research and serious funding.  Meanwhile it's a pretty safe bet even more of those assets will continue to migrate into Asian hands.

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Richard SOley | April 30, 2010

    The Oil Sands are the single largest reserve of Oil in the world, the private corporations of Arabia do not report stats. In conjunction with this fact is the geographic location which puts in in the middle of any pipeline from the arctic coast close to both the ALaskan and the Canadian sites of the future. Included in this is the Shale gas of northeastern BC so why does teh US not become independent? I can only think that current policy makers have little or no experince and have allowed themselves to be lulled by long standing friendship with Canada. False hope as Canada will sell to the highest bidder, make no mistake the future is not certain and the US needs to pay attention the next century of energy while we switch to alternatives is at risk. With the current Oil spill off the coast the risk of offshore drilling will have a negative impact on access to new sources of energy. As an investor in Oil sands I ask the question why are we as a continent selling this reserve of the future to ASiA?

    • fred e | April 30, 2010

      AS Canadians we have to very cautious about our friends to the south. Oil requires pipelines. If they all went south and not to salt water it would make us subject to any legislative whims ie tarrifs on "dirty oil" Two prime examples of this are the softwood lumber tarrif of 15% that has cost our producers billions and the BSE embargo that essentially has killed our cattle industry. We need to have a variety of options for our production to assure we get world prices.

  2. Dan C | April 30, 2010

    Most of the energy we use is for junk and services we don't really need. The worries about Canada's oil or Middle East oil or Venezuela's oil are based on the trickle-down economics which are actually taking place. The oil industry is at the top of the pyramid, but the base of the pyramid is plastic McDonald's toys, gas-guzzling vehicles with one person in them, and factories making iPads while millions of people drive to work to burn up oil working to market more stuff that people don't need. The future is one without cheap oil. The sooner we rearrange our priorities to reflect that, the better off we will be when the Saudi Arabian Oil Kite falls on an empty desert. The recent oil rig explosion will destroy the Gulf Coast and bring new regulations and worries just when Obama's plan to keep the drillers busy in the Atlantic was to get going.
    Meanwhile, we have replaced actual people doing actual labor with easy oil and electricity. Anyone still wondering how to put people back to work?
    Our entire system has become a 'child harvester' that takes people through an 'education' that is solely based on cheap energy and competitive waste production. The solution is not to get more oil and 'make it up in volume'. We need to apply modern methods to 'powering down' so that there will be a stable economy based on valuable people doing useful work for each other.

  3. Barbara | April 30, 2010

    Very insightful article.

  4. Tom Henderson | April 30, 2010

    This article seems to assume that national governments make all the critical energy investment decisions everywhere. This may be true in some countries, but in the U.S., it seems the private sector energy firms would make these decisions to explore, produce, partner with, (or not) with any country in the world. So a natural question (in addition to what the US Government does) seems to be: What are the multinational energy companies doing re: Canadian oil sands development?

  5. Ivan the Not-So-Terrible | April 30, 2010

    Western economics is based on overproduction, overconsumption, and waste. The US has 10% of the worlds population and consumes 40% of the world's oil. On crap.

    Back home, in the bad old days, we squandered far less of our energy on excessive lighting, refrigiration of shopping areas, expensive packaging, pointless movement, and so on. Our evil soclailist state invested in decent public transportation, education, and infrastructure. We had our problems, but nobody was bankruped with an otherwise trivial illness by the health care industry either. There was none of that pointless consumerist economic growth.

    Look at North Korea. Wide boulevards, no cars. Bicycles. This is the future.

    The current depression was triggered by the $100+ price of crude. Economic recovery and the price of crude are in a deadly embrace, economic recovery fosters the rising price of oil which in turn chokes any economic recovery. 10 years ago, Russia, China, India, etc. were not addicted to oil, today they are, the demand picture is quite different today. What makes America great? Cheap energy. And it is not expected to remain that way much longer.

    The only way for the US to get out of this energy mess is to go cold turkey. The sooner the better. Oil sands to China, fine. Oil sands make sense at $100+ per barrel, anything below that is a losing proposition. All that natural gas (from the US) to get the oil out of that sand is better used to heat those poorly insulated cheap houses.

    At this point the Obama administration should be thinking about a gradual shift, first shift refining capability to heavier fuels, diesel, aviation, etc. and get gasoline up to $10 a gallon. Get those cars off the road. Concentrate on more necessary trucking and aviation. (You can fly on ammonia, but it smells bad) Contrary to the business model? Too bad. What's good for America is good for GM. More Chevy Volts, but not as a hybrid, like the EV1. Fix the national power grid. Telecommuting. Tele-schooling. Why bus US kids to some distant central building for a poor education when they can get it at home?

    The salad days of cheap energy are nearly over. The US has to wean itself off the waste.

  6. sanjay | April 30, 2010

    things are very good in the news

  7. H. Craig Bradley | April 30, 2010

    China does have a longer term view in as far as its national strategic economic and financial policies go. However, they might become overconfident in their ability to micromanage short term financial developments. In contrast, the free market (private) requires successful public companies to look out for shareholder interests, both short term (current quarter) and long term. Otherwise, they won't survive very long or grow their business and revenue.

    Many U.S.public companies have come and gone through the years, many. Many others have been merged or bought out. It is part of capitalism, but it is the best way to maintain a growing economy and standard of living. China will never achieve that for the vast majority of their people ( 1 Billion). There flat out aren't enough resources to support that many Chinese at anything close to the standard of living that most Americans currently enjoy. There's a difference.

  8. Thomas Benson Esq. | April 30, 2010

    Enjoyed your articles – Please sign me up

  9. kblawatt | April 30, 2010

    The Oil Sands are the property of the Canadian people. We can sell to whom and when we so desire. Too often in the past we have not fared well and certainly not in our own self interests (A US mantra) in dealings with the US…The NAFTA is a case in point. This agreement favours the US almost completely at our expense.
    Good luck.

  10. Joachim Mueller | May 1, 2010

    History is haunting the US. The writer is referring to Canada as "America's northern neighbor". Sorry, Canada is America, too. The US arrogance of considering itself "America" denigrates everyone else on the continent. The nation was created by war and kept on warring like ancient Rome. Many institutions are like in the ancient Rome and the senators like to wield the same kind of power like the Roman senators. The US fought more wars in it's short history than other nations in 1000 years (and I am not referring to the "Thousand Year Reich" of Adolf Hitler). So the attitude is: "We just go and get what we want". Does not work anymore, not even in Iraq or Afghanistan.

    The US has to learn that she is just one country among others and that mutual respect is essential for good relationships. The US does not have a good reputation for diplomacy. Carrying a big stick is not the way to go. Others have big sticks, too.

    I do not blame Mr. Obama for the lack of an energy plan. The country is ripped apart by to many individual interests who stop at nothing to get it their way. There is no working together for the best of the whole. The cheerleaders still tell everyone they live in "the best country in the world" and most people believe it. That is no substitute for leadership which brings me back to Mr. Obama. He is tied down by all these lobbyists and ideologists who abuse the freedom in the country to be just self serving.

    The Wild West lives on!

  11. Kgharts | May 3, 2010

    Joachim Mueller | May 1, 2010 WRITES;
    "I do not blame Mr. Obama for the lack of an energy plan. The country is ripped apart by to many individual interests who stop at nothing to get it their way. There is no working together for the best of the whole. The cheerleaders still tell everyone they live in “the best country in the world” and most people believe it. That is no substitute for leadership which brings me back to Mr. Obama. He is tied down by all these lobbyists and ideologists who abuse the freedom in the country to be just self serving."

    You are right in describing the political climate in Washington DC. BUT, an national energy policy is one of the top priorities coming into office. Obama is president of the best, most prolific committee making apparatus on earth – Washington DC.

    Its wealth can muster the best of economic advisors/team the world can provide in the midst of any ongoing crises, or political badgering from lobbyists, etc. at the mere ordering his staff to assemble a team. He could have ordered his staff between holes 6 and 8 on the golf course after a little thought and breakfast (thinking is optional).

    In addition, he is not bogged down with anything he doesn't want to be bogged down with. He has provided us with indifference to his pet projects at every step of opposition to his policies, and is seemingly unaffected by the harranging, such as you would get from special interests.
    He does not do the work of planning, he makes decisions and so far, very little positive examples come forth.. There is no excuse not to have a viable energy policy by now. Nore does he emit a radiance of a great leader at all, at least to the thinking public.

    I believe it is part of his change plan. Its all politics, as a socialist and revisionist. He has to create the conditions that demand a scream to do something, while walking a thin line between impeachment. Hitler created the same gig before WWII, until the people begged for anything to alliviate the misery.

    Obamas' real energy policy is non-existant or half-baked intentionally.

    Or, a general incompetence by himself and his staff have generated a general complacency and confusion. His waffling/flip-flops is evident he has no clear idea what he has proposed versus what he needs to do. For this you need to assemble a competent energy team to formulate clear, accurate options to work from. He apparently isn't working on either.

    Either way, the American people are going to get it in the shorts. BTW, it is still the best country in the world, though a bit worn from the wear. The wear that need not have to be, if more people cared more for the country than profiting from their selfish agendas, from politics to banking. Pelosi and Reid are two examples of self-interest artists for whom recovery will be lengthened. Pork in Legistlative bills is another; insertion of viable projects unrelated to bills is another reason the process gets convoluted. If its worth noteing, its worth its own bill and discussion on its own merits. So the whole system and Washington DC needs an emema.

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